Time for Mr Modi to pay political price by decontrolling fertilizer sector

DECEMBER 06, 2017

By TIOL Edit Team

PRIME MINISTER Narendra Modi has kindled a new hope among the policy-shackled sectors such as the fertilizer industry, which is also victim of GST anomalies.

The reason for positivity is Mr. Modi's resolve to pursue reforms notably prevention of corruption for better future of India.

At the recent Hindustan Times Leadership Summit, PM reportedly stated: "I might have to pay a political price for the path I have taken (against corruption), but I am ready for it".

He added: "Our government has a holistic approach. We don't work in silos, and we work together ...".

If NDA Government takes a holistic approach, it would realize it is impossible to attain the goal of doubling farmers' income in five years without requisite reforms in agri-inputs arena especially in seeds, fertilizers and pesticides sectors.

And the backlog of reforms in huge and challenging in each of these segments. Notwithstanding political inertia on agri-inputs industries, fertilizers industry has tried to tag its reforms agenda with political agenda of doubling growers' income.

The Fertiliser Association of India (FAI) is thus holding its three-day annual conference with the theme 'Fertilizers and Farml income' to once gain plead for freedom from price and marketing controls, which it considers as a key to serving farmers with innovative agri-solutions.

Says FAI: "The fertilizer industry can directly contribute in achieving the Government's goal of doubling farmers' income by 2022. It is well acknowledged that fertilizers contribute 50% in the increase in food grain production / productivity".

To realize this, FAI wants industry wants 1) restructuring of urea pricing-cum-subsidy policy to check industry's losses; 2) bringing urea under nutrient-based subsidy (NBS) to promote balanced use of nutrients and thus increasing farm productivity and 3) removing GST annomalies such as 18% tariff on inputs ammonia, phosphoric acid, etc. as against 5% on fertilizers (finished products). The industry also wants the Government to extend GST to natural gas, which is the key input for manufacture of urea, the over-subsidized and the most over-used fertilizer.

The statutory retail price for urea has been increased modestly only twice in last 15 years, the 2 nd hike (10%) was made during April 2010. The Government has admitted time and again the delterious impact of subsidy bias for urea. The adverse impact include: imbalanced application of fertilizers, sub-optimal impact of such usage on crop yields and rise in fertilizer subsidy.

"The industry needs to be decontrolled so as to unleash its full potential,"over the medium term," pleads FAI. It wants the Government to pay fertilizer subsidy directly to farmers and not use the industry as subsidy channel.

Can Modi break away from the playsafe path (read controls) chosen by Nehru Government and treaded by all successive regimes.

Successive regimes have exhibited lack of political will to undertake holistic fertilizer reform recommended by upteenth number of committees and commissions. Fertilizer industry is the only sector that has been kept tied to multiple controls especially price controls since the Independence!

It is here pertinent to cite one case from the archives. The Report of the Tariff Commission on the fair prices of superphosphate for the period from 1st January to 15th August 1952 was presented to Parliament during February 1953.

If the Government of day can't live without price controls, then the price computation and its implementation should be transparent & reasonably profitable to the controlled sector. A 12-15% return on net worth is acceptable to many industries, for want of any other alternative. FAI claims urea industry earned a negative return of -0.7% in 2016-17.

The problem with fertilizer price controls is that they are arbitrary and defy logic. There is no reason why one product should be out of control and one not. There is no reason why urea should be under statutory price control and NBS fertilizers under non-statutory/deemed controls. Lastly, there is no rationale for using delayed payment of subsidy as a regular tool for management of fiscal deficit.

The subsidy arrears of Rs 43,356 crore in 2015-16 are projected to decline to Rs 30,000 crore in 2017-18. Delayed payments mean increase in working capital and rise interest burden, which is estated at Rs 3000 crore for 2017-18. This interest burden is not factor in computation of cost of production of urea. Fixed costs in such cost calculation have been kept unchanged since 2002-03.

Instead of resolving these issues through major initiatives such as urea price hike, the Government has chosen dubious method of containing fertilizer subsidy. It has decided to reduce the size of urea bag by five kg to 45 kg. The rationale for this is that full-scale introduction of neem-coated urea has led to nitrogen use efficiency. The Government concluded that this calls for reduction in bag size as farmers assess urea requirement in terms of bags. The fact is that universities recommend all fertilizer requirements in terms of kg/hectare or acre.

Such tinkering a bit here and a bit there shows reluctance on the part of Modi Government to sacrifice populism for real benefit of farmers and agriculture. It must have the courage to explain the nation the logic for bringing urea under NBS as win-win option for farmers, exchequer and the consumer.

Similarly, it must resolve all pending issues in seeds and pesticides sectors. The new legislation for both of them is pending for many years.